Telefonica is under pressure to reduce its presence in Brazil just when the huge Latin American country is starting to fulfil its potential for massive mobile broadband growth as it moves towards extensive 3G and early 4G. The authorities believe that the Spanish group, which generates most of its growth from South America, has too much market share following its recent moves to increase its holdings in Telecom Italia.
Telefonica was fined $6.3m by the Brazilian antitrust regulator, Cade, this week and ordered either to reduce its own holdings in the country or convince Telecom Italia, in which it is a major shareholder, to offload its own local cellco.
The company may buy a year or so via an appeal, but is expected to have to reduce its activities in Brazil eventually as the government looks to stimulate new competition. The most likely option is to see Telecom Italia’s TIM Participacoes unit, but the Italian incumbent is reluctant to sell a subsidiary in such a strong growth market.
Cade wants to reduce Telefonica’s market share to its level before 2010, when it just held a 50% stake in cellco Vivo and a minority stake in Telco SpA, which controls Telecom Italia. In 2010, however, it acquired full control of Vivo, and in September this year, it took over Telco, and so increased its influence over its Italian partner. Vivo and TIM Participacoes now control more than half of Brazil’s wireless market. Cade’s deadline for compliance from Telefonica is unknown.
Despite Telecom Italia’s reluctance, sale of its Brazil unit would help address is debt problems. The unit is valued at almost $12bn and many believe a sale is inevitable. Robin Bienenstock, an analyst at Sanford Bernstein, told Bloomberg that Cade’s action ‘will simply accelerate the timetable for a bid for TIM. Telefonica has a strong interest in seeing TIM Brasil broken up.’ TIM’s CEO Rodrigo Abreu said Telefonica did not have the ability to force a sale however, and said the Spanish group should instead reduce its indirect stake.
However, another issue is who would buy TIM Brasil. The regulator does not want the number of competitors to be reduced, which could preclude existing cellcos America Movil and Oi, and of course Vivo, from bidding or breaking TIM up between them. According to the telecoms regulator, Vivo is the mobile market leader by subscriber numbers with 29%, followed by TIM on 27%, America Movil on 25% and Oi on 19%.
The same region’s second largest mobile economy, Mexico, is also taking steps to open up the competitive landscape. The country’s new comms regulator, the IFT, has notified incumbent America Movil that it will face a probe of its market dominance, as part of a wider plan to reform telecoms. America Movil has about 70% mobile market share though the investigation will also examine its fixed line business, Telefonos de Mexico. The country’s leading broadcaster, Televisa, will also be investigated. The IFT has until March 9 to determine which players are dominant in the telecoms and TV markets and apply measures to make them more competitive. Possible remedies might include regulating America Movil more heavily than its rivals, for instance by charging it higher termination rates, or forcing it to unbundle its network or even sell assets.